It took the weight of the Chinese Politburo to improve the fortunes of the country’s stock market in 2024 after several years in the doldrums.
The MSCI China index delivered a 17.7 per cent return over the year, propelled by state-backed stimulus and helping to claw back some of the double-digit losses suffered over the prior three years.
And long-suffering Chinese equity investors could be further rewarded for their patience in 2025, with further stimulus packages hoping to reignite the world’s second largest economy.
Today marks the start of the Chinese year of the snake, which represents, among other things, rebirth.
Investors looking for a bargain in 2025 could find that Chinese equities have the answer – but they must also be wary that the snake doesn’t bite.
Trade war on the horizon
Chinese companies will be keeping a close eye on Donald Trump’s second term as US President.
Trump has promised to institute tariffs on a number of countries, which he says will boost the US economy and increase tax revenue. China is set to be the chief focus of this policy.
Year of the snake: Chinese equities markets will be hoping to experience the ‘rebirth’ promised by the lunar new year
There has, as of yet, been no definitive announcement of what kind of tariffs China will face, but Reuters previously reported that median estimates from experts indicate a 38 per cent rate on goods from China could be on the way.
The value of US imports of Chinese goods totaled $562.9billion in 2022, according to the country’s most recently published government data. The US goods and services trade deficit with China was $367.4billion.
Last week Trump said he was considering a 10 per cent tariff on Chinese goods that could begin as soon as 1 February.
This marks a rhetorical climbdown, with the President having threatened tariffs as high as 60 per cent while on the campaign trail last year.
Hetal Mehta, head of economic research at St James’s Place, said: ‘While initial pronouncements from President Trump came and went without any concrete actions in terms of China tariffs, there remains nervousness amongst Chinese policymakers, as it seems the new US president is keen to use tariffs as a major bargaining chip.
‘This heightened trade risk remains a key factor for investors to monitor in the months ahead.
‘The ongoing trade tensions and evolving policy measures, while creating challenges, also highlight unique opportunities as China continues to adapt its economic model.
‘Particularly, the country’s efforts to pivot towards greater domestic consumption and expand its market share in regions outside the US.’
However, Bola Onifade, portfolio manager at Nutmeg, cautions that trade tensions should not push investors to make rash decisions with their portfolios.
She said: ‘While tariffs could have an impact on Chinese markets, investors should try not to pre-empt any decision and stick with their investment strategy until something is actually announced.’
China’s domestic demand dilemma
Even without problems emerging from abroad, China has had a difficult time on the home front.
The nation’s consumer sector was its worst performing in 2024 with industrial output outstripping demand at home in December, while unemployment also increased to 5.1 per cent from a previous five per cent in the same month.
Nevertheless, Chinese GDP expanded 5.4 per cent in the fourth quarter compared to the same period in 2023, beating expectations.
As ever, though, investors should take official economic data out of China with a pinch of salt.
Mehta said: ‘Despite the official Q4 real GDP beating expectations, the monthly activity data continues to signal an imbalance of strong production but weak domestic demand.
‘This suggests a sluggish recovery in consumption, compounded by persistently low inflation.’
Meanwhile, the all-important Chinese property sector has been bogged down since Evergrande and other developers collapsed in 2021.
The collapse dashed any remaining confidence in China’s housing market and left thousands of properties half-built while countless people were left with mortgages on homes that didn’t exist.
‘The property sector, though showing tentative signs of stabilisation, remains under pressure, with valuation downgrades exerting a considerable strain on the banking system,’ Mehta said.
Data China’s National Bureau of Statistics reveals that new and existing home prices in tier one cities like Beijing and Shanghai declined at a slower rate year-on-year over the past few months.
The gradual stabilisation seen in the sector came after the Government announced economic stimulus measures, such as lowering mortgage rates by 0.5 percentage points in a bid to also boost household spending.
The Chinese central bank will also fund a loan initiative allowing state-owned firms to buy unsold homes to repurpose them as affordable housing.
Chinese stocks bounced back last year after three years of double-digit losses
Onifade said: ‘Consumer wealth is concentrated largely in real estate, in contrast to the US, exacerbating recent challenges in the property sector.
‘While the Government announced a stimulus package in 2024 to reboot the economy, calm markets, and sure up the real estate market, more needs to be done to change the narrative surrounding the economy and improve consumer confidence.’
The stimulus measures aim to target sluggish domestic demand, with a trade-in scheme for consumer goods launched, offering discounts of up to 20 per cent on electricals.
Launched earlier in 2024, the Government has since expanded the initiative from items like TVs and phones to include dishwashers, microwaves and rice cookers in a bid to increase consumer spending.
Gabriella Macari, senior investment manager at Arbuthnot Latham, said: ‘If we do see Chinese demand pick up again, it’s likely that China’s trade partners (including Europe) will benefit. The other side of this coin is that Trump’s promised tariffs could dampen the globally significant supply side of the economy.’
Downturn in markets
China’s economy accounts for some 17 per cent of global GDP, but makes up just three per cent of the MSCI Global Index.
The lag experienced by Chinese equities comes largely as a result of its recent challenges.
Over the past five years, China’s SSE index has grown just 13 per cent, and until September had been on a downward trajectory for the past two years.
This compares to the growth of almost 47 per cent seen by the New York Stock Exchange over the same period.
Chinese equities have tumbled in value, leaving them at a significant discount to international peers.
Dale Nicholls, portfolio manager of investment trust Fidelity China Special Situations, said: ‘Today, investors can access that opportunity at close to record low valuations, with Chinese equities trading at a 55 per cent discount to US equities and a 25 per cent discount to emerging market equities excluding China.’
Shake-up: US tech stocks tumbled after Chinese AI platform DeepSeek became Apple’s most popular App Store offering
China, Mehta says, is the standout example of emerging markets underperformers, despite similar discounts across other markets.
Mehta added: ‘The ongoing trade tensions and evolving policy measures, while creating challenges, also highlight unique opportunities as China continues to adapt its economic model.
‘Particularly, the country’s efforts to pivot towards greater domestic consumption and expand its market share in regions outside the US — notably Europe and Asia — could provide valuable growth drivers, even amidst the broader geopolitical turbulence.’
Corinne Lord, senior investment specialist at St James’s Place, said: ‘Despite the current challenges, valuations in China remain attractive relative to their historical levels, particularly given the broader economic context.’
There is still potential
Chinese AI chatbot DeepSeek recently hit headlines after becoming the most popular application on Apple’s App Store.
The kicker is that the firm spent just $6million to train its AI, or so it says, compared to the hundreds of millions spent by OpenAI on developing its ChatGPT model.
The news saw American chipmaker Nvidia lose $600billion of its value in one day alone.
While DeepSeek is a private company, innovation is clearly alive and well among Chinese corporates.
Nicholls said: ‘Innovation continues to thrive, and many companies with the right products and services are increasing market penetration, maintaining or gaining pricing power, and growing market share often both at home and abroad.’
With promising firms trading at significant discounts, there could be an opportunity for investors to capitalise on turning fortunes.
Nicholls says industrials are at the forefront of innovation.
He said: ‘Many Chinese firms have achieved scale in advanced manufacturing, supplying critical materials and components to growing industries like renewable energy, electric vehicles, and life sciences.’
Meanwhile domestic brands such as Temu owner PDD Holdings could benefit from their low valuations despite strong opportunities abroad and growing spending domestically.
Nicholls also said there are opportunities for other domestic brands to make the most of a return of consumer demand.
However, not all are convinced. Onifade warns: ‘Chinese markets had one of their strongest years for returns since the pandemic last year, but valuations have fallen below key competitors following a decade of underperformance.
‘While this might prove enticing for investors looking to pick up cheap exposure to the world’s second largest economy, the current picture shows the makings of a valuation trap for those increasing their investments in China.’
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